FSA

A. Liquidity Ratio

Ratio Formula

1. Current Ratio/ Working Capital/ Banker's CA

Ratio
CL

Cash+ Cash Equivalents+ Net Rec'bles +

2. Acid Test / Quick Ratio
Marketable Securities

CL

Cash + Cash equivalents + marketable

Cash Ratio
sec
CL
Cash + Cash equivalents + marketable
Cash to CA ratio
sec
CA
Cash Flow Ratio Operating Cash Flow
CL

Cash equivalents + net rec'bles +

3. Defensive Interval marketable sec
Daily Operating Cash Flow

Increase in RE + Depreciation
4. Investment Financing

Current Investment

Weighted Non-cash CA
5. Liquidity Index

CA

D. Cost Mngt. Ratios

Ratio Formula

Net Sales - COS

1. GP rate / GP %
Net Sales
 Labor Cost
2. Labor Cost
Net Sale

# of Workers, 200B - # of Workers, 200A

3. Employment Growth Rate

# of Workers, 200A

F. Growth Ratios
Ratio Formula
Inc. Available to
1. BEPS Common SH
Ave. Common
Shares
Outstanding

EPS
2. Earnings Yield
MP per share

Cash provided by operations -

3. Cash Flow per share pref.dividends
Com. Share Outstanding

Cash Div. per Common Share

4. Div. Payout
EPS

Cash Div. per CS

5. Div. Yield
MP per share

Net Cash provided by operations

6. Ratio od Oprtg. Cash flows to Cash Div.

Cash Div.

7. Internal Growth Rate Amt. Retained

 Asset Base

8. Sustainable Equity Growth Ret.on Common Eq. x ( 1 - DP ratio)

 > non cash cur. assets are weighted by multipying their balances by
the AVE. DAYS they are removed from CONVERSION to CASH

E. Profitability Ratio
Ratio Formula

Net Inc.
1. PM on Sales/ Net Profit %
Net Sales
 EBIT
2. Net Oprtg. Inc. to Sales
Net Sales

3. ROI / Ret. On Total Assets / Return Net Inc.

on Invted Capital

Ave. Total Assets

EBIT
4. Net Oprtg. Inc. to Total Capital
Equity + Int.bearing debt

Change in EBIT
5. Marginal Profitability Rate

Change in Capital

6. Ret. On Common Equity

NI - Preferred Dividends
Ave. Common Equity

7. Marg'l Ret. On common Equity

Change in NI
Change in Com.Eq

8. Ret. On Total Eq. NI - Div. on Redeemable

Pref.Stock
Ave. Total Eq.

9. EVA
Net Oprtg.Profit after Tax less
Capital Charge or Total COC

G. Valuation Ratios

Ratio Formula

Equity
1. BV per share =
Shares Outstanding
2. Market to Book or Price to Book =
MP per share
BV per share
B. Leverage Ratios

Ratio Formula
1. Financial Leverage Ratio/ Equity Ave. Total Assets
Multiplier/ Leverage Factor
Ave. Common Equity

Return on Common Equity

2. Fin'l Lev. Index
Ret. On Assets

Int.-bearing debt
3. Interest-bearing Debt Ratio
Equity + interest - int.bearing debt

4. Total Debt Ratio Total Liab

Total Assets (Capital)

5. Debt to Equity Total Liab

Equity

6. Debt to Tangible Net Worth Total Liab

Equity - Intang.Assets

7. Time interest earned (tie) / interest EBIT

coverage

interest expense

8. Fixed Charge Coverage/ Earnings to EBIT + Interest portion of operating

Fixed Charges leases
Interest + interest portion of optg.
Leases
> Capital Charge = total capital
employed x WACC

3. Price-earnings MP

EPS

4. Ret. On SH Div. yield + Cap.Gains

Measurement Period
5. Q-Ratio MV of ALL sec

Replacement of Cost of Assets

6. Ret. On SH Invtment Div. per share + MV of REinvted earnings

Price per share
 C. Asset Mngt. Ratios

Ratio Formula

COS
1. FG / Merch. Invty. Turnover
Ave. Invty

2. Ave. Age of Invty. / No. of # of days in a Year

Days of Invty.
Invty. Turnover
or
Ave. Invty.

Ave. Daily COS

Net CREDIT Sales

3. Rec'bles T.O.
Ave. AR

4. Ave. Age of Rec'bles / No. of # of days in a Year

Days of AR / Ave. Collection
Period Rec'bles T.O

or

Ave. AR

Ave. Daily Sales

5. Optg. Cycle / Conversion Ave. Age of Invty. + Ave. Age of

Perio Rec'bles

Ave. AP
6. Ave. Age of AP

Ave. Daily Purchase

7. Fxed Assets T.O Net Sales

Ave. Net Fxd Assets

8. Total Assets T.O Net Sales

 Ave. Total Assets

9. Total Capital T.O Net Sales

Total Capital

> Total Assets having

explicit cost ( equity +
int.bearing debt)
Total Capital, 200B - Total Capital,
10. Invtment Rate 200A
Total Capital, 200A

Amt. Available for Reinvtment

11. Plowback Ratio

Net. Inc.
 Contribution Margin Method

1. BEP pesos FxC

BEPp= CM% or
WaCMR

2. BEP units FxC

BEPu= CMu or
WaUCM

3. WaCMR WaCMR = Total CM or CMR x SMixRatio*

Total Sales
*Total BESales x SMixRatio
S* - VC** = CM

*units x SP
**units x Vcu

4. Margin of
Safety MSp = Sp - BEPp
MSu= Su - BEPu or MSp
SP

MSR = MSp or MSu

Sp Su

5. Operating Leverage %change in profit

Factor / DOL DOL or Total CM or before tax
OLF = Profit
before tax %change in Sales

6. Req. Sales w/ desired

Profit
A. Single product
1. Before tax FxC + DP
RSu=
CMu or CMR
2. after tax FxC + (NP / (1- Tx%))
RSu=
CMu or CMR

3. desired
profit ratio RSu= FxC or FxC
CMu - Pu* CMR - PR
 *Pu = SP x PR

B. Multiple Product
1. before tax FxC + DP
RSu= WaUCM or
WaCMR

2. after tax FxC + (NP / (1-Tx%))

RSu= WaUCM or WaCMR
 High Low Method

VC = Y2- Y1 Change in cost Cost at high activity level - Cost at low activ
X2- X1 Change in activity High activity level - low activity leve

Least Square Regression

Y = a + bX

b= n(XY)- (X) (Y) X= activity level (independent variable)

n (X^2) - (X)^2 Y = total mixed cost (dependent variable
(Y) - b(X) a = total fxd cost (vertical intercept)
a=
n b = VC per unit (slope of the line)
n = # of observations
= sum across ALL 'n' observations

%change in profit
before tax

%change in Sales
evel - Cost at low activity level
evel - low activity level

pendent variable)
ependent variable
cal intercept)
of the line)

observations
 Standard Cost Variance Analysis

Materials Standards
Standard cost of Mat'l per unit of product = Standard Qty. per unit of product x
Direct Labor Standards
Standard labor cost per unit of product = Standard Time(hrs) per unit x
Total Budgeted Cost
TBC = Budgeted Production x SC per unit
Total Standard Cost
TSC = Actual Production x SC per unit

Variance Analysis
MATERIALS
Variance:
Actual Mat'l Cost = AQ x AP
- Standard Mat'l Cost = SQ x SP or Actual production x St. Materials Cost per unit
Mat'ls Cost Variance

Analysis:
Spending or Price Variance
= (AQ x AP) - (AQ x SP) or (AP-SP)x AQ
= difference in prices x actual qty.

Efficiency or Qty. (AQ x SP) - (SQ x SP) or (AQ - SQ) x SP

Variance=
= difference in qty. x standard prices

TOTAL FOH VARIANCE ANALYSIS

Variance:
Actual FOH
- Standard FOH = ST x SFOH
FOH variance

Analysis:
2 way: 3-way:
Controllable Variance Spending Variance
Variable Spending Variable Spending
Variable Efficiency Fxed Spending
Fxed Spending Variable Efficiency Variance
Volume Variance Volume Variance
Total OH Variance Total OH Variance
MATERIALS PRICE, MIX, AND YIELD VARIANCE ANALYSIS
Variance:
Actual Matl's Costs = total actual cost of matl's USED
- Standard Mat'l Cost = Actual production x Ave. Standand Output Cost
Materials Cost Variance

Analysis:
Price Variance = difference in prices x actual qty.
Mix Variance = (AQ at SP - Actual Input at Ave. SIC)
Yield Variance= (Actual input at Ave SIC) - SC*
 standard Price per unit of mat'ls

standard labor rate per hour

DIRECT LABOR
Variance:
Actual Labor Cost = ATime x ARate
Materials Cost per unit - Standard Labor Cost = ST x SRate or actual production x St.Labor c
Labor Cost Variance

Analysis:
Spending or Rate
Variance = (AT x AR) - (ST x SR)
= difference in rate x actual time

Efficiency or Time (AT x SR) - (ST x SR) or (AT - ST) x SR

Variance=
= difference in time x standard rate

4-way:
Variable spending
Variable efficiency
Fxed spending
Volume or capacity
Total OH Variance
put Cost
 VFOH
Variance:
Actual VFOH = AT x AVOHRate
oduction x St.Labor cost/u - Standard VFOH = ST x SVOHRate
VFOH Variance

FxFOH

Variance:
Actual FxFOH
- Standard FxFOH = ST x SFxFOHRate
AT - ST) x SR FxOH Variance

Analysis:
FxOH Spending or
Budget Variance = (AFxOH - BudgetedOH)

Volume or Capacity
Variance = (BudgetedFxOH - SFxOH)
Pricing Methods
1. Cost-based Pricing 2. Market-based pricing or Buyer-based pricing
Cost-plus price -> price = cost + markup Target Price - Target Profit = Target Cost

Based on Total Costs:

Price = Total Cost + (TC x MU%)

Based on Absorption Product Cost

Price = APC + (APC x MU%)

Based on VMftg. Cost

Price = VMC + (VMC x MU%)

Based on Total VC
Price = Total VC + (Total VC x MU%)
g or Buyer-based pricing
ofit = Target Cost
 Operating Income:

Sales
less: VMftg cost
Mftg. CM
less: V non-mftg. Cost
CM
less: controllable fxd costs
short-run performance margin
less: direct, non-controllable fxd costs
Segment margin
less: common costs allocated to segment
Operating Income

Income > can be : OI or EBIT; NI; NI adjusted for price level change; or cash
ROI =
Investment > can be : Total Assets; Operating Assets excluding idle assets; WC

Residual Income
Income earned by, or expected inc. of an invtment center - Desired income*
=
*(Investment x DRR or COC)

EVA= (EBIT x [1-tx%]) - Desired income*)

*(after tax WACC x [Total Assets - CL])

Equity Spread = Beg. Equity Capital x Ret. On Equity - % Cost of Equity

Total SH Return (TSR) = Change in Stock Price + Div. per share

Initial Stock Price

Market Value Added (MVA) = MV of Equity - Equity supplied by SH

Throughput or Mftg. Cycle Time = Process time + inspection time + move time + queue tim

Mftg. Cycle Efficiency = VAT or Process Time

Throughput or Mftg. Cycle Time

Productivity = Output
Input
e level change; or cash flow
cluding idle assets; WC plus other assets; or SHE

Desired income*

move time + queue time

Budgeted Production
Budgeted Sales
Add: Desired ending FG
Total
Less: Expected beg. FG
Budgeted Production

Budgeted Materials Purchase

Budgeted Production
x Qty. mat'l required per unit of production
Total mat'l to be used
Add: desired ending mat'l invty.
Total
Less: Expected beg. Mat'l invty.
Budgeted Mat'l purchases

Budgeted Merchandise Purchases

Budgeted Sales
Add: desired ending merch.invty.
Total
Less: expected beg. Merch.invty.
Budgeted Merchandise Purchases

Cash Budget
Cash bal., beg.
Add: receipts
Total cash available before current financing
Less: disbursement
excess (deficiency) of cash available over disbursement
Financing
Cash bal., ending.
Time Estimates

to + 4tm + tp to= optimistic time

te =
6 tp = pessimistic time
tm = most likely time
te= time estimates

Linear Programming
illustration

Meemon Corp. produces 2 products, Girl Rag doll (G) and Boy rag doll (B), which must be proces
departments, Sewing and Finishing. Sewing has 240 hrs.available per month , while Finishing has

G B
CM per unit P32 P24
Req. hrs/unit:
Sewing 4 2
Finishing 2 4

How many units of G and B can be produced to maximize CM?

Shadow Price:
1. Add one unit of scarce resource under considerations
2. Find new optimal solution
3. Shadow price = Profit in orig. solution and profit in new optimal solution

Maximize: CM = 32G + 24B

Subject to: Sewing constraint: 4G + 2B 240
Finishing constraint: 2G + 4B 192
Optimal solution: Produce 48 units of G and 24 units of B. total CM from this is 2,112

Shadow price for Sewing constraint:

Add 1 hr. to sewing constraint
4G + 2B = 240 +1
New optimal solution:
4G + 2B = 241
(2G+4B = 192) - 2 = - 4G - 8B = -384
- 6B = -143
B = 23.83

4G + 2(23.83) = 241
4G + 47. 66 = 241
G = 48. 335

Total CM, new opt. solution 32 ( 48.335) + 24( 23.83) = 2,118.64

Total CM, orig. opt solution 32 (48) + 24(24) = 2,112
Shadow price 6.64
 Queuing Theory
Formula for single service facility and random

B
1. N =
T-B

oll (B), which must be processed in 2

r month , while Finishing has 192 hrs.
2. Nq = B^2
T (T-B)

3. W = Nq
B

his is 2,112
ice facility and random arrival of working units

N= average # of work units WAITING in

line or being SERVICED
B = ave. # of work units arriving in one
unit of time
T = ave. # of work units SERVICED in one unit
of time (assuming no shortage of work units)
B < 1 otherwise queue is infinite
T length

Nq = ave. # in the waiting line

Management of Current Assets

Cash conversion cycle ( operating cash conversion )

Invty. Conversion period + rec'bles collection period - payable deferral period

CCC = or

Ave. age of invty. + ave. age of rec'bles - ave. age of payables

# of days in a year ave. invty.

Invty. Conversion Period or
or Ave. age of invty. = invty. TO ave. COGS per day

Invty. TO = COGS
Ave. Invty

Rec'ble collection or Ave. # of days in a year or

ave. AR
age of rec'bles = AR TO ave. sales per day

AR TO = Net Cr.Sales
Ave. AR
# of days in a year ave. AP
Payable Deferral or ave. or
age of payables = AP TO ave. purchases per day

Net Cr.Purchases
Ave. AP

Cash Flow Management

OC =
2TD
i

T = fixed transaction cost (cost of secturities tranx or cost of obtaining loan)

I = interest rate on mark'ble sec or cost of borrowing cash
D = total demand for cash pver a period of time
 Inventory Model

EOQ = 2aD
eferral period
k

a = cost of placing ONE order (ordering cost)

yables
D = ANNUAL demand in units
K = ANNUAL cost of Carrying ONE unit in invty for one year

in mftg.operations, economic lot size (esl)

ESL =
2aD
k

a = set-up cost
D = ANNUAL production requirement
K = ANNUAL cost of Carrying ONE unit in invty for one year

Ave. Invty. EOQ

= 2

{
Safety stock + Normal lead time usage

or
Reorder point if there
is safety stock required Maximum lead time x average usage

Normal Time usage = normal lead time x ave. usage

Safety stock = (max. lead time - normal lead time ) x ave. usage
Reorder point if no safety stock required = NLT usage
 Sources of Short term Credit

annual rate = int. cost per period

x
usable loan amt.

= discount%
x
ty for one year 100% - disc %

* net period or # of days accoung is outsta

Cost of Bank Loans:

Reg. Interest Rate = Interest

Borrowed Amt.
ty for one year
Disc. Int. Rate = Interest
Borrowed Amt -
Interest.
al lead time usage Effective int. rate = Interest

Usable Loan Amt.*

x average usage
*ULA = loan amt. - disc interest - compensating bal.

Cost of Commercial Paper:

Effective Annual Int. Int. Cost per period x
Rate = Usable Loan Amt.

Cost of Capital
Source Capital COC
Creditors LT debt After tax rate of interest i(1-Tx%)
SHs:
Preferred PS Preferred Div per share
Current MP or net issuance price
Common CS EPS
MP per share

Other ways of computing COC:

1. Capital Asset Pricing Model (CAPM)
R= RF + (RM - RF) R= COC
Rf= risk free rate determined by gov
= beta
Rm= market return
(Rm-Rf) = market risk premium
(Rm-Rf) = risk premium
 # of days in a year
# of days funds are
used

# of days in a year
net period* - disc
period
ays accoung is outstanding

# of days in a year
# of days funds are
borrowed
te determined by gov't sec

et risk premium
k premium
Methods that do not consider the time value of money

Payback Net cost of initial investment

Period = Annual Net cash infows

ARR = Ave. annual net income

investment

Methods that consider time value of money

1 i = disc rate
PV factor =
(1+ i) ^N N = # of period

PV of Future Cash Flows = Future cash flows x PVF

FVF = ( 1 + i)^N
FV of Future Cash Flows = Present cash flows x FVF

Net Present Value IRR:

1. PV of Cash Inflow Step 1:
- PV of Cash Outflow Determing the PVF for IRR:
NPV PVF for IRR Net cost of invtm
or = Net cash inflo
2. PV of Cash inflow
- PV of Cost of Invtment Step 2:
NPV PV annuity table, find the line 'n'
or
3. PV of Cash inflow
- Cost of Invtment Payback Reciprocal:
NPV Net cash inflows
PR =
Investment
Profitability Index or
Total PV of cash inflow 1
PI =
Total PV of cash outflow Payback period
or if COI is the only CF
Total PV of cash inflow
PI =
COI
NPV Index = NPV
Invtment
oney

he PVF for IRR:

Net cost of invtment
Net cash inflows

able, find the line 'n' (Eco.Life), if CF are not unifor, trial and error.

Net cash inflows

Investment

1
Payback period